Some investors are betting Research in Motion’s (RIM) stock is in for more pain, even after a rough three years.
Shares of the BlackBerry maker have lost more than 38 percent since February. Investor attempts to pick a bottom in the stock have been run over by a slide dating from June 2008, when it peaked at US$148.
Some in the options market don’t see the trend arresting itself, making long-term bearish bets that RIM shares will fall to the mid-US$30s by January next year.
“There is a major divergence of opinion on the stock,” said Bret Jensen, chief investment strategist at Simplified Asset Management, a hedge fund based in Miami, Florida. “While some argue that it’s somewhat like Apple before the big comeback, considering the cash flow and the attractive P/E -ratio, others are asking: ‘Is this going to be the new Palm?’”
Palm was another high-flying maker of handheld computers whose shares dropped dramatically as the market for smartphones became competitive. It is now owned by Hewlett-Packard Co.
RIM has been disappointing investors in recent months. Sales and earnings forecasts have been cut.
Its BlackBerry smartphone lineup has steadily lost market share, especially in the hyper-competitive US market, to devices such as Apple Inc’s iPhone and those running Google Inc’s Android software.
Since early March, RIM shares have struggled to hold above their 10-day moving average, seen as buffering against further losses. The stock fell 1.1 percent at US$43.74 on Friday.
Short interest is currently at a five-month high at 6 percent of the outstanding float, according to NASDAQ.
However, a Thomson Reuters StarMine analysis puts the stock’s intrinsic value at US$99.44, assuming a 10-year cumulative annual growth rate of 7.3 percent, below the industry average.
The stock’s trajectory since February is ugly. Since hitting a 52-week high of US$70.54, the pattern has been: Drop sharply, attempt a rebound and get whacked again.
More disturbingly, volume has ticked up of late as the share slide has picked up speed.
For the stock to turn around, it would need to rally and sustain gains at what technical strategists call a “gap” in its price — the sharp decline that occurred late last month from the mid-US$50s to the US$40s.
“The bottom of that gap is at the US$50 area, so the stock would need to rally sharply from current levels just to begin that process,” said Bryant McCormick, an independent quantitative analyst at optionMonster.com.
Earlier this week, RIM recalled some of its Playbook tablet computers because of an operating system flaw. The company had hoped the launch of the long-awaited tablet could revive its fortunes, but the product garnered poor reviews and complaints it had been rushed out before it was ready.
Because of the recall, RIM’s NASDAQ-listed shares fell as low as US$42.61, just US$0.09 above a trough in August last year.
On the same day, an options trader bought 3,500 puts at the January 2012 US$40 strike for an average premium of US$3.77 each, sold 7,000 puts at the January 2012 US$37.5 strike at an average -premium of US$2.83 and picked up 3,500 puts at the January US$35 strike for an average premium of US$2.10 each.
The strategy, known as a bearish put butterfly spread, implies an average break-even share price of US$39.79 by expiration in January.
Maximum profits will be made if RIM shares plunge nearly 15 percent from the current price to settle at US$37.50 at expiration, according to Caitlin Duffy, options analyst at Interactive Brokers Group.
A butterfly put spread involves a bet shares will fall, but only to a specific level. One profits by selling puts at a strike price that is between purchases at strike prices on each side, or the “wings” of the butterfly.
“Butterfly spreads on the stock suggest some options players expect RIM’s losing streak to continue into next year,” she said.